The Research Of Economic Capital Allocation Optimization In Commercial Banks Based On RAROC Method

In 2004,the Basel Committee on Banking Supervision issued the "New Basel Capital Accord",which demonstrated the integration between economic capital allocation and internal management system of banks.How to allocate the limited economic capital is gradually becoming an unavoidable problem for modern banking operations and management.International advanced banks has already formed the RAROC framework as core of economic capital allocation after decades of innovation. It is under this background that this dissertation been carried out.Economic capital allocation is directly related to the allocation of scarce resource--bank capital,it is the key to realize value creation for commercial banks. The dissertation made a comprehensive presentation of the connotation,principles and styles of economic capital allocation.With regard to the specific method of economic capital allocation,the dissertation discussed the RAROC approach in detail which has been commonly implemented by practitioners,analyzed the theoretical basis of RAROC methodology, and proved this methodology on mathematical derivation.RAROC could measure the risk and profit of bank under a unified framework, which is the advantage compared with other methods.The application of RAROC in economic capital allocation can be reflected in two ways---ex ante decision optimization and ex post dynamic adjustment.In the study, we found a simple RAROC approach has its limitations,and it must be combined with absolute value indicators such as EVA.In addition, there exist drawbacks in the economic capital allocation based on RAROC,and differences are existed between risk reflected by RAROC and completeness of the hurdle rate,which may lead to the inefficiency of economic capital allocation.To solve these problems, the dissertation build a multi-factor model based on RAROC,which set the value maximization as target,and set hurdle rates banks or capital quotation as constraints, then use mathematical programming methods to realize economic capital allocation optimization. The dissertation also gave a numerical example.With the liberalization and increasing competition of Chinese banking, it becomes an urgent question for banking managers to establish and improve the economic capital allocation system gradually. We believe that whether economic capital allocation system can be effective depends on relevant environment,which require banks take deeds in following ways:cultivating economic capital management strategy aimed at value creation;establishing multi-layers,responsible and smooth organization system of economic capital management;establishing efficient feedback mechanism of economic capital allocation.